1/15/2010 @ 4:40PM

Why Google Is Quitting China

It’s easy to give up if you’ve already lost the battle. And
Google
is doing just that in China. Eric Schmidt’s move to quit offering a censored Google.cn search engine to the Chinese market has been read by idealists as the right thing to do. But it is first a business decision.

Even though
Google’s
market share climbed from 15% in mid-2006 to 31% today, the company had hoped for a bigger share by now. Kai-Fu Lee, Google China’s former president, told me in 2006 that Google not only wanted to have a competitive product to Baidu’s, the local search leader, but a superior product. This didn’t happen: Baidu has only increased its market share, going from 47% in mid-2006 to 64% today. That’s a big lead.

Baidu, started by China-born entrepreneur Robin Li in late 1999 just as Larry Page and Sergey Brin were cranking up Google in Silicon Valley, understands the local Chinese market better than Google’s Mountain View team.

Google fumbled with an initially inferior Chinese search engine launched in 2000, while Baidu grabbed the lead in China–and kept it–with several innovative search features customized for local tastes. Baidu introduced community-oriented services that appealed to Chinese Internet users, including bulletin boards where leads on information could be exchanged–a service that Google China’s former president Kai-Fu Lee dismissed as having nothing to do with search. Baidu also offered instant messaging, a hit with China’s Netizens.

Plus, Baidu was first to the market with mobile search and information offered up in multimedia, including video clips. Baidu also set up a national network of advertising resellers in 200 Chinese cities to educate businesses about the power of online advertising–a step that Google did not take.

Baidu’s search feature for music also proved highly popular. Google, realizing the potentially illegal nature of the free music downloads, opted to provide links to music stores instead. Baidu later began collaborating with music labels on authorized downloads.

One other key factor put Baidu in the lead: Its search technology was considered superior to Google’s in the Mandarin language. Scrambling to catch up, in 2005 Google hired the experienced Lee as its president from
Microsoft
. Then in 2006 Google launched its first Chinese-language search engine run from China, Google.cn. With Lee at the helm, Google recruited dozens of top engineers and linguists to its Beijing headquarters to perfect search results on Google.cn. Working at the towering headquarters of Google China at Zhongguancun Software Park in northwestern Beijing, some 100 engineers wrote codes to deal with inputting Pinyin or Roman letters to signify Mandarin sounds and such intricate tasks as delineating words in Chinese characteristics that don’t clearly define white spaces.

The efforts paid off with speedier and more precise search results as well as more reliable service. But no matter the global brand name, the maximized effort and the financial resources, Google’s Chinese search engine couldn’t trump Baidu.

Perhaps Google should have turned over its business to local rival Baidu and let Baidu run with it. There is a precedent. Back in 2005 Jerry Yang turned over the management reins for
Yahoo!
in China to Jack Ma, the charismatic leader of China’s e-commerce powerhouse Alibaba. Yang knew that Ma, thinking local, acting local, would have a better shot at getting the right formula for China.

Granted this is still a work in progress as Yahoo! refines its features for the Chinese market. But as Zeng Ming, former president of Yahoo! China, told me, “The net is about culture. You can’t have expats running it.”

Indeed, why give up now–unless you realize there’s no way you’re ever going to win the race. After all, Page and Brin had already crossed the line back in 2006 by agreeing to have their new Google.cn, run from China, subject to censorship. They didn’t have much choice. All companies doing business in China follow the same Chinese government rules. Yes, Baidu’s search results are also censored.

It wasn’t all that long ago–2004–that it looked like Google might use Baidu as its entry route. Google invested $5 million in Baidu for a 2.6% stake but shifted strategy in mid-2006 by selling those shares for more than $60 million and rolling out Google.cn the same year. In hindsight, and given its bumpy history in China and this latest jockeying with the Chinese government, maybe Google should have pursued the go-with-Baidu strategy.

If Google exits the $300 million Chinese search market now, it’s giving Baidu runway to be a monopoly. And if that happens, Baidu has a shot at becoming the world’s dominant search company (it’s already entered Japan) by sheer arithmetic alone.

By serving China’s nearly 300 million Internet users and 670 million mobile phone users–both the world’s largest markets–Baidu may someday be bigger than Google globally, something Robin Li once told me he has no doubts will happen.

Rebecca A. Fannin is an internationally recognized author and journalist who has been writing about entrepreneurship and innovation for nearly 20 years. Her book, Silicon Dragon, was published by McGraw-Hill in 2008 and translated into several languages. During the height of the dot-com boom from 1999-2001, she was international news editor at Red Herring, later joining the Asian Venture Capital Journal as international editor and writing for several leading business publications, including Inc., The Deal, Worth, CEO and Fast Company. She also authored “A New Dawn” for KPMG in 2009. Fannin has lectured at several universities in Asia and the U.S., and has made numerous public speaking appearances worldwide. For more info, see www.rebeccafannin.com.